Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Can We Lock Up Rachel Maddow Now? - 25th Mar 19
Real US National Debt Might Be $230 Trillion - 25th Mar 19
Friday's Stock Market Sell-Off - New Downtrend or Just Correction? - 25th Mar 19
20 Days Left to Find Buying Opportunities In Gold - 25th Mar 19
Will the Historic Imbalance in Gold Stocks to Gold Price Resolve ? - 25th Mar 19
EasySMX Wireless Games Controllers Review - 25th Mar 19
Stock Market Short-term Top - 25th Mar 19
UK Population Growth - Latest ONS Immigration Statistics and Consequences - 24th Mar 19
The Fed Follows Trump's Tweets, And Does The Right Thing - 24th Mar 19
Yield Curves, 2yr Yield, SPX Stocks and a Crack Up Boom? - 24th Mar 19
Risk/Reward in Silver Favors Buying Now, Not Waiting for Big Moves - 23rd Mar 19
Similarities Between Stock Market Today and Previous Bull Market Tops - 23rd Mar 19
Stock Market DOW Seasonal Trend Analysis - 23rd Mar 19
US Dollar Breakdown on Fed Was Much Worse Than It Looks - 23rd Mar 19
Gold Mid-Tier GDXJ Stocks Fundamentals - 23rd Mar 19
Which Currency Pairs Stand to Benefit from Prevailing Risk Aversion? - 23rd Mar 19
If You Get These 3 Things Right, You’ll Never Have to Worry About Money - 22nd Mar 19
March 2019 Cryptocurrency Technical Analysis - 22nd Mar 19
Turkey Tourist Fakes Market Bargains Haggling Top Tips - 22nd Mar 19
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

Bernanke's Stagflationary Gold Show Must Go On?

Commodities / Gold & Silver Mar 05, 2008 - 08:26 PM GMT

By: Brady_Willett

Commodities Best Financial Markets Analysis ArticleBen Bernanke has attacked the threat of deflation with great zeal. We knew that he would. But what we don't know is how Mr. Bernanke will respond to today's stagflationary pressures, if at all, and/or whether or not the slumping dollar will eventually ignite a monetary policy response.  Yes, Mr. Bernanke has assured policy makers and investors that fighting recession is higher on the Fed's check list than directly attacking inflation.  However, if USD creation is the primary cause of the inflationary problem now rupturing through out the global economy Bernanke may have little choice but to eventually switch focus.


Suffice to say, Ben Bernanke is one of the major reasons why gold is hitting record highs today. Bernanke's Fed has aggressively cut interest rates in an attempt to liquidity a financial marketplace burdened by terrifying episodes of seizure and failure, but what they have not been able to do is disperse monetary stimulus with any degree of precision. Thus, during a time when investors do not want to buy stocks and they are not eager to bottom pick real estate, the commodities arena is attracting money flows.  So long as the Fed keeps promising more rate cuts and flows to equities and real estate remain restrained, eroding investor confidence in the U.S. dollar has the potential to keep the commodity fires stoked.

Given that supply/demand fundamentals do play a key role in determining commodity prices, it may seem a stretch to blame Bernanke for the commodities boom now transpiring. To better illustrate some of the forces at work drawing on one of Bernanke's most famous quotes is applicable (bolds added):

Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.  By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so , the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.
  Bernanke. November 21, 2002

If the correlation is not otherwise clear, commodity prices – and precious metals in particular – are efficiently responding to Bernanke's pledge to keep cutting interest rates before such cuts actually transpire. Still not following? Well, the promise of more Fed intervention immediately hurts the dollar because no other major central bank is as dovish as Bernanke's Fed, and the slumping dollar immediately sends players into precious metals.  Moreover, as the Fed's super-dovish words and actions fail to ignite a return of confidence in either stocks or real estate – the two major assets on the consumer's balance sheet – precious metals attract even more flows from investors too scared to hold traditional assets.

If this all sounds confusing fear not because when, and if, other central banks start trying to debase their currencies in response to Bernanke's ploy the plot thickens and gold goes superboom! Or so the story goes...

Goldscape IPO Launch at $1,000 an ounce?

Recall if you will the Netscape IPO in 1995. It was common sense back then that led to the conclusion that a money losing and nearly revenueless experiment should not be valued at $2+ Billion after its stock price nearly tripled (intraday) on its first day of trading. But, as the arrival of countless hot IPOs in the years that followed proved, common sense failed to produce results for some time.

Point being, the contrarian conditions that made precious metals a strong buy in the late 1990s have long vanished. Instead what we have today is a bull market in gold and other commodities that is being fueled, in part, by the greater fool theory. Akin to the IPOs that followed Netscape, investors have watched commodities perform well and many have decided that they want to participate. Higher prices beget higher prices as participation expands regardless of the fundamentals.  The only question is whether or not even more inflows are around the corner.

In short, while I believe that $1,000 ounce gold will come to resemble a top more so than a launch pad, it may be important to remember that I regarded Netscape as pure mania only to watch the insanity continue for nearly 5-years afterwards. In other words, gold could continue to attract investors much longer than most think possible, and $1,000 ounce could be the headline grabber that opens the floodgates.

Needless to say, one of the major problems with definitively coining precious metals a bubble is that Bernanke appears far removed from the inflationary attitude his Fed has produced.  Bernanke logic says that the Fed has the power to immediately restore some confidence in USD by credibly threatening to attack monetary inflation. Question is, when will Bernanke, fixated on stimulating, switch focus?

By Brady Willett
FallStreet.com

FallStreet.com was launched in January of 2000 with the mandate of providing an alternative opinion on the U.S. equity markets.  In the context of an uncritical herd euphoria that characterizes the mainstream media, Fallstreet strives to provide investors with the information they need to make informed investment decisions. To that end, we provide a clearinghouse for bearish and value-oriented investment information, independent research, and an investment newsletter containing specific company selections.

Brady Willett Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Mark Turner
06 Mar 08, 02:05
Historically Silver Equals a Days Pay.

How one can possibly compare the price of gold to the price of xyz.com during the dot com boom beggars belief. What does not beggar belief is history; historically an ounce of silver was approximately a days pay. An ounce of gold was worth approximately 16 ounces of silver. When silver reaches 200 of today's dollars and gold 3'200 of today's dollars their prices have mealy reverted to the mean. Most of us can only remember post 1971 fiat money, when it collapses (that's when, not if, as that's the fate of all fiat tokens throughout history) I think we will find that the limited number of ounces of gold and silver will command far higher premiums that that, after all, the populations demanding them are far far greater than they were several hundred years ago.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules